NEW YORK (Reuters) — Still hurting from
last year's see-through yoga pants debacle, Lululemon Athletica Inc
<LULU.O> is about to face a new headache: stepped up competition
from rival yoga retailers, department stores and hot new brands.

The company is facing aggressive competition from stores such as Gap
Inc's <GPS.N> Athleta, VF Corp's <VFC.N> lucy, Macy's Inc <M.N> and
others selling activewear at lower prices at far more locations.

Small but hot yogawear brands such as Sweaty Betty and Lorna Jane
also pose a potential threat, but the biggest competition is
expected to come from Athleta, which will open some 35 stores this
year, tripling its locations to 100 stores in just two years.

"Lulu has had clear sailing up until now. They were the gorilla in
this category," said Kelsey Scroggins, a senior vice president at
Marvin Traub Associates, a consulting firm.

Long a Wall Street darling for its dizzying revenue growth, the
Vancouver, Canada-based company recently reported its first decline
in quarterly comparable sales since 2009.

Lululemon shares are more than 35 percent below their 52-week high
on investor concerns about growing competition. The company is
expected to provide an update to Wall Street at its analyst day on
Thursday.

Lululemon's U.S. sales hit the $1 billion mark for the first time
last year, more than triple what they were two years earlier, making
it the top specialty retailer in the $14.5 billion women's
activewear market in the United States.

But Lululemon's growth in same-store sales — a key measure of
performance for retailers, of 2 percent lagged the womenswear
market's 9 percent rise, according to NPD Group.

While Lululemon's international expansion is under way and the
chain's first men's stores will open by 2016, investor worries
persist about its U.S. business, which represents two-thirds of
sales.

Lululemon declined to comment for this story. But Chief Executive
Laurent Potdevin admitted to investors last month that Lululemon is
"not the only game in town anymore."

The company's image is still recovering from the yoga pants recall
and a controversy in November when founder Dennis "Chip" Wilson said
some women's shapes "actually don't work" with Lululemon's yoga
pants.

YouGov BrandIndex, which scores consumer perception of brands on a
scale of minus 100 to plus 100, said Lululemon's score was -8, well
below the +15 before the controversy.

Nevertheless, the company still has devoted fans, and it has said
there is room for 100 more U.S. stores on top of the 170 locations
it currently has in its biggest market.

"If I have to buy new pants, I'm going to buy Lululemon," said
Jennifer Stephens Acree, 44, an avid yogi from Los Angeles who
praises the pants' quality and fit over those of rivals.

Gap Inc's CEO, Glenn Murphy, expects Athleta, which was an online
retailer when Gap bought in 2008 for $150 million, to eventually
emerge as the retailer's fourth major chain, after Gap, Banana
Republic and Old Navy. The company does not break out sales for
Athleta.

At Gap's investor day on Wednesday in San Francisco, Murphy said
Athleta is "super" profitable with sales per square foot that are
higher than Gap Inc's average, with potential for international
stores eventually.

With Gap Inc's comparable sales weak so far this year, after a
modest 2 percent rise last year, Murphy is under pressure to make
Athleta a hit.

Athleta's strategy has been to offer yoga wear at roughly 20 percent
less than Lululemon, in part by tapping Gap's clout with vendors and
stable of designers, and offering a wider array of casual clothing
such as hoodies.

"A lot of spending on women's apparel has shifted to activewear,"
said Nancy Green, general manager of Athleta.

For example, Lulu sells standard black yoga pants for $98, while
Athleta sells its for $59 — though they are not made of the same
materials. Athleta sells hoodies for $98, about $10 less than what
they go for at Lululemon.

Macy's Idealogy activewear brand will be sold at 400 stores this
year, up from 160 in 2013, and Bloomingdale's recently started
selling the hip Barry's Bootcamp activewear brand.

VF hopes to get in on the action, too, with its lucy yogawear. After
buying the 60-store chain in 2010, VF, whose other brands include
the North Face, is ready to expand the lucy brand, often seen as
catering to a less fashion-forward customer than Lululemon.

"It's an area that's wide open," VF's chief financial officer, Bob
Shearer, said in a recent interview. "We are at a place where we can
open new stores and build that business."

(Reporting by Phil Wahba in New York; additional reporting by Solarina Ho in Toronto;
editing by Jilian Mincer, Eric Walsh and
Leslie Adler)